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Articles of Association (AoA)

Corporate Law Project

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 NATIONAL LAW UNIVERSITY

CORPORATE LAW PROJECT

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ARTICLES OF ASSOCIATION

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 Articles of Association

TABLE OF CONTENT

Contents

Introduction................................................................................................................................2

RELATIONSHIP BETWEEN MEMORANDUM AND ARTICLES.......................................4

Flexibility...............................................................................................................................4

Subordinate............................................................................................................................4

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Contemporaneous Documents...............................................................................................4

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Distinction between memorandum and articles.........................................................................6
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BINDING FORCE OF ARTICLES...........................................................................................7

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Members as members.............................................................................................................7

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In relation to outsiders............................................................................................................7
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Invalidity of the articles by reason of conflict between the Act, Memorandum of

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association and other laws:.....................................................................................................8

CONSTRUCTION AND INTERPRETATION OF ARTICLES...............................................9

ALTERATION OF ARTICLES OF ASSOCIATION...............................................................11

Restrictions...........................................................................................................................12

DOCTRINE OF CONSTRUCTIVE NOTICE AND INDOOR MANAGEMENT................14

Doctrine of Constructive Notice..........................................................................................14

Doctrine of Indoor Management..........................................................................................15

[2]
 Articles of Association

INTRODUCTION

Company according to Justice Lindley is “An association of members, the shares of which
are transferable”. In other words, by a company it is meant association of many persons who
contribute money or money’s worth to a common stock and employ it for a common purpose.
The common stock so contributed is denoted in money and is the capital of the company. The
working of a company is governed by the constitution of that respective company . The
constitution of the company is contained two documents- the memorandum of association
and the articles of association.

This division of the constitutional documents was first adopted by the Joint Stock Companies
Act, 1856. Before that act the constitution of the English company was contained in one

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document, viz., the deed of settlement. The system of the uniform constitution is still in use in

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many Continental company laws. In the U.S.A also the legislature provide for the division of
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. in U.K.
the constitutional documents similar to that applying to companies
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The articles of association of a company, often simply referred to as the articles are the
a the shareholders and directors of the
regulations governing the relationships between
company, and are a requirement for n
y the establishment of a company under the Indian Law
d Together with the memorandum of association, they form
and that of many other countries.
u Articles of association typically cover the issuing of shares
the constitution of atcompany.
S the different voting and dividend rights attached to different classes of
(also called stock),
share, restrictions on the transfer of shares, the rules of board meetings and shareholder
meetings, and other similar issues. The articles of association of a company are its bye laws
or rules and regulations that govern the management of its internal affairs and the conduct of
its business.

According to section 2(2) of the act ' articles' means the articles of association of a company
as originally framed or as altered from time to time in pursuance of any previous company
laws or of the present Act i.e. the Act of 2013.

They also establish a contract between the company and the members and between the
members inter se .This contract governs the ordinary rights and obligations incidental to

[3]
 Articles of Association

membership in the company1 . Articles are like partnership deed in a partnership .They set out
provisions for the manner in which the company is to be administered .

It is optional for a public company limited by shares to have its own articles of association.
However, it is compulsory for an unlimited company or a company limited by guarantee or a
private company limited by shares to have its own articles of association. According to sub
section (1) of the section 7 of the companies act 2013 , during incorporation of a company , it
shall file to the registrar of companies (RCO) the Memorandum and Articles of Association
(MOA & AOA ) for registration .

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1 Naresh Chandra Sanyal Vs CalculltaStock Exchange Association Ltd. AIR 1971 SC 422

[4]
 Articles of Association

RELATIONSHIP BETWEEN MEMORANDUM AND ARTICLES

FLEXIBILITY

The articles regulate the manner in which the company's affairs will be managed. The
memorandum defines the company s objects and various powers it possesses; the articles
determine how those objects shall be achieved and those powers exercised. But the
Companies Act, 1956 does not require the articles to provide for certain specified matters in
the same way as it requires the memorandum to do. Thus the articles of companies might
vary substantially, and the utmost flexibility is allowed to persons who formed the company
to organize its management as they wish. m
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SUBORDINATE

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The articles are subordinated
and controlled by the memorandum. Also, the articles are only
internal regulationst uthe members can alter as long as they don t exceed the powers of
which
the company S 2
as laid down by the memorandum. Also in cases of conflict, the memorandum
prevails.

CONTEMPORANEOUS DOCUMENTS

The memorandum and articles are basically contemporaneous documents and can be read
together and any ambiguity or uncertainty in the one can be removed by referring to the other.

2 Ashbury v. Watson: [1885] 30 Ch .D 376 CA

[5]
 Articles of Association

In fact this has been done in various cases. In Re, South Durham Brewery Company3, the
memorandum was silent as to whether the company s shares were to be all of one class or of
different classes, it was held that a power a power given by the articles to issue shares of
different classes resolved the uncertainty and enabled the company to do so. In Rainford v.
James Keith and Blackman Company Ltd4., where the memorandum of a training
company empowered to do all things incidental to achieving the object, it was held that
provision in the articles empowering the company to lend money merely exemplifies the
general words of the memorandum and the company was, therefore entitled to lend money to
its employees.

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3 [1885] 31 Ch. D 261

4 [1905] 2 Ch. 147

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 Articles of Association

DISTINCTION BETWEEN MEMORANDUM AND ARTICLES

While memorandum contains the fundamental conditions upon which the company must be
incorporated, the articles provide the internal regulations of the company. While
memorandum must be within the framework of the Companies Act, the articles are subsidiary
to both the act and the memorandum. Finally, while acts done by a company beyond the
scope of the memorandum are absolutely void, acts beyond the articles can be ratified by the
shareholders provided the particular provisions are not beyond the memorandum.

The distinction between the two was well brought out by Bowen, L.J. in Guiness v. Land
Corporation of Ireland5 where he pointed out that the memorandum contains the
fundamental conditions upon which alone the company is allowed to be incorporated. They
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are conditions introduced for the benefit of the creditors and the outside public, as well as

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share-holders. The articles are the internal regulations of the company .

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5 22 Ch. D. 349, 381.

[7]
 Articles of Association

BINDING FORCE OF ARTICLES

The articles constitute a social contract which is also a sophisticated way of saying that they
constitute the constitution of an association. The articles create a contract binding each
member of the company but the member is only bound qua member. The articles also create
certain rights and obligations between the members and the company. Even between a
member and a company, the articles of association constitute a contract only in respect and
liabilities as a share holder but not in respect of rights and liabilities which he has in a
capacity other than that of a member. The articles constitute a contract between individual
members.

MEMBERS AS MEMBERS
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The company is bound to its members in the same way members are bound to the company,
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and just as the liabilities imposed upon the member are limited to the liabilities incurred by
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yn to be conferred upon him by the Articles as a
him in this capacity, so are the rights which he has against the company limited to rights qua
member. Consequently, a right purported
dnormally be enforced by him by virtue of the articles.
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director or an outsider cannot
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IN RELATION TO OUTSIDERS

The articles do not per se constitute an enforceable contract between a company and an
outsider. This is no doubt due to privity of contract and lack of mutuality. Outsider means a
person who is not a member or a member acting in a capacity other than that of a member.
Even a director is normally treated as an outsider for this purpose. Any right claimed by an
outsider must be conferred by a separate contract or relationship outside the articles.

[8]
 Articles of Association

INVALIDITY OF THE ARTICLES BY REASON OF CONFLICT BETWEEN THE ACT, MEMORANDUM

OF ASSOCIATION AND OTHER LAWS:

Any provision in a company s Articles will be ineffective if it is in conflict with the

memorandum, the Companies Act or any other law for the time being in force. For example,
in the case of Peveril Gold Mines, Re6 it was held that statutory rights of members under the
Companies Act cannot be nullified through articles like right placing restrictions to present a
petition for winding up. Where the memorandum defines the rights of the respective classes
of shareholders such rights cannot be altered by the articles. However, where the class rights
are set out in the memorandum and the memorandum and articles do not contain a variation
of the rights clause, those rights can be varied if all the members of the company agree to the
variation. The articles are void to the extent of inconsistency even if the provision in the

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memorandum with which it is inconsistent is not required by law to be there.

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6 (1808) 1 Ch 122

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 Articles of Association

CONSTRUCTION AND INTERPRETATION OF ARTICLES

Articles of association are commercial documents and must be liberally constructed. In

interpreting them, the maxim, ut res magis valeat quam periat should be applied which
basically means 'validate if possible' . The general presumption is that the parties have
expressed every material term which they intended to govern their agreement, whether oral or
in writing. But it is well recognized that there may be cases where obviously some term must
be implied if the intention of the parties is not to be defeated, some terms of which it can be
predicated that it goes without saying , some term not expressed but necessary to give to the
transaction such business efficacy as the parties may have intended.

It was held in the case of S.S.Rajkumar v. Perfect Castings Pvt. Ltd7. that the articles of
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association of a company, being a business document must be interpreted strictly, unless there

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are compelling circumstances to import into it a meaning other than normal. Though the

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general presumption is that every material term in the articles regulating a company have

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been expressed, yet in some cases, certain terms are necessarily implied in order to give effect
aChandra Manilal Nanavati v. Jivan Lal C.
to the intention of parties as held in Somesh
Chennai. 8
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The articles are drawn up for the purpose of internal administration of the business and

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cannot supersede the objects set out in the memorandum of association. The courts should
hesitate to place an interpretation on the articles which may have the effect of imposing
restrictions on transferability which may be in restraint of trade and therefore, opposed to
public policy.

In construing the relevant articles of association, the court may, before accepting any specific
construction, take into account all the relevant Articles together with the byelaws. If the

7 (1968) 38 Comp Cas 187.

8 (1956) 26 Comp Cas 148

[10]
 Articles of Association

words are ambiguous, attempt should be made to reconcile them and adopt such construction
of the words as would avoid conflict between them. This was held in Shiv Omkumar
Maheshwari V. Bhansidar Jagannath9. It was also held in the same case that, where the
articles of association of the Chamber of Commerce provided that all disputes arising out of
or in the course of all dealings and transactions between its members shall be settled by
arbitration, it was held that a dispute as to the existence of a transaction or dealing itself was
not covered by the articles and there was no obligation upon any member to refer such
dispute to arbitration.

It was held in Sunil Dev V. Delhi and District Cricket Association10, where the conduct of
the parties reveals that there has been some practice in vogue for several years which was
accepted by everyone concerned without any challenge or question, then that practice in the
course of long years in itself becomes an indication that the articles of association were
understood in that sense.

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It was further held in G. Karunakaran V. State of Kerela11 that unless the exercise of

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pleasure by the Governor is shown to be mala fide or against the public interest, the court
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a in the place of another.
cannot interfere with the order nominating a person as director

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9 (1957) 27 Comp Cas 255: AIR 1956 Bom 459.

10 (1994) 80 Comp cas 174 (Del)

11 (1987) 61 Comp cas 334 (Ker).

[11]
 Articles of Association

ALTERATION OF ARTICLES OF ASSOCIATION

A company can alter its internal regulations by a special resolution provided the alteration
does not stand in direct or implied conflict with the memorandum or provisions of the statute.
So subject to the provisions of the Act, and the Memorandum, a company may alter and add
anything to its articles by special resolution. When alteration of the articles is made to give
effect to the conversion of a public company into a private company, it shall require the
approval of the central government. On approval of such alteration by the Central
government, a printed copy of the altered articles shall be filed with the Registrar of
companies within one month of the date of receipt of the order of approval. If alteration of the
articles is not inoperative or void by reason of inconsistency with the provisions of the Act or

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Memorandum, the alteration shall be deemed to be valid as is originally contained in the
articles.
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In the garb of alteration of articles of association, a Company cannot provide for expulsion

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of a member by the management because it is opposed to the fundamental principles of
company jurisprudence and is therefore ultra avires the company. It is not necessary to prove
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that all alterations in the memorandum nor articles are to be effected in all copies of the
memorandum and articles.d If in any time a company issues any copy of the memorandum or
tuthe alterations made therein, the company and every officer of the
articles without showing
Sto punishment with a maximum fine of ten Rupees for every copy so
company is liable
issued.

In Scott V. Frank F. Scott (London) Ltd12 it was held that the court has no jurisdiction to
rectify the mistakes in the articles of those do not accord with what is proved to have been the
concurrent intention of the signatories at the time of signature. In the case of Grant V. U.K.
switchback Rys. Co.13, it was held that although a resolution giving the directors powers to
do certain acts in future which they are not authorized by the articles to do would amount to

12 (1940) 3 All ER 508

[12]
 Articles of Association

alteration of the articles and would require a special resolution to be passed. But where the
directors entered into a contract without authority of the adoption of the contract which was
within the objects of the company by ordinary resolution would not amount to alteration of
the articles.

RESTRICTIONS

Alteration of the articles is made subject to few restrictions.

Firstly, the articles must not exceed the powers given by the memorandum or be in conflict
any provisions of the memorandum. In such a case, the memorandum will prevail.

Second, the alteration must not be inconsistent with any provisions of the Companies Act or
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any other statute. In Madhava Ramachandra Kamath v. Canara Banking Corporation14,

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where a resolution was passed expelling a member and authorizing him the director to

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register the transfer of his shares without an instrument of transfer, the resolution was held to

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be invalid as being against the provisions of the act. However, the Articles may impose on the
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conditions of the memorandum y
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company conditions stricter than those provided under the law but must not dilute the
and of The Act.
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Third, the altered articles must not include anything which is illegal or opposed to public

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policy or unlawful.

Fourth, the alteration must be bona fide for the benefit of the company as a whole. In Allen
V. Gold Reefs of West Africa Ltd15. a company had a lien on all shares not fully paid-up for

13 (1888) 40 Ch D 135

14 [1941] 11 Comp Cas 78 (Mad)

15 [1900] 1 Ch. 656.

[13]
 Articles of Association

calls due to the company. There was only one shareholder A who owned fully paid up shares.
He also held partly paid up shares in the company. A died. The company altered its articles by
striking the words fully paid up and thus giving itself a lien on all shares whether fully paid
up or not. The legal representative of A challenged the alteration on the ground that the
alteration had retrospective effect. It was held that the alteration was good as it was done
bona fide for the benefit of the company as a whole, even though the alteration had a
retrospective effect.

Fifth, the alteration must not constitute a fraud on the minority by the majority. In Brown v.
British Abrasive Wheel Co.16 the majority which held 98% of the shares passed a special
resolution that upon the request of the holders of 9/10th of the issues shares, a shareholder
shall be bound to sell and transfer his share to the nominee of such holder at a fair value. The
alteration was held to be invalid since it amounted to oppression of minority.

Sixth, there cannot be alteration of articles so as to compel an existing member to take or

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subscribe for more shares or in any way increase his liability to contribute to share capital,
unless he gives his consent in writing.
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Seventh, an alteration of articles to effect a conversion of a public company into a private
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company cannot be made without the approval of the Central government.

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Eighth, a company cannot justify breach of contract with third parties or avoid a contractual

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liability by altering articles.
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Ninth, the amendedtregulations in the articles of association cannot operate retrospectively
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but only from the date of amendment. Also provisions by way of contractual obligation in
articles of association of a company cannot limit statutory power of a company to alter its
articles. Finally, amendment of articles to empower Board of Directors to expel a member is
opposed to the fundamental principles of company jurisprudence and is ultra vires the
company.

16 [1919] 1 Ch 290

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 Articles of Association

DOCTRINE OF CONSTRUCTIVE NOTICE AND INDOOR MANAGEMENT

DOCTRINE OF CONSTRUCTIVE NOTICE

Section 399 provides that the memorandum and articles when registered with Registrar of
Companies become public documents and then they can be inspected by anyone on payment
of a nominal fee. Therefore any person who wants to enter into a contract with the company
has the means of ascertaining and is thus presumed to know the powers of the company and
the extent to which they have been delegated to the directors. This is known as doctrine of
constructive notice . However, this is more or less an unreal doctrine as people know a
company through its directors and not its documents. m
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In TCB Ltd. V. Grey17 where a debenture issued by a company was signed by a solicitor as
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attorney of director of a company but not the director personally. The articles of the company
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provided that every instrument to which the seal shall be affixed shall be signed by a
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director . Even so the company was held liable. Stating the effect of the new provision, the
court said that before this enactment came into force a person dealing with the company was
d and articles to satisfy that the transaction was within the
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required to look at the memorandum
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The courts in India also do not seem to have taken the doctrine of constructive notice
seriously. In the case of Dehra Dun Mussoorie electric tramway Company V.
Jagmandardas18 the articles of a company expressly provided that the directors could
delegate all their powers except their power to borrow. Even so, an overdraft taken by the
managing agents without approval of the board was held to be binding, the court saying that
such temporary loans must be kept outside the purview of the relevant provision.

17 1986 JBL 10

18 AIR 1932 All 141

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 Articles of Association

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 Articles of Association

DOCTRINE OF INDOOR MANAGEMENT

This rule, as against the previous rule, tries to protect outsiders from the company. The rule is
based on obvious reasons of convenience in business relations. The memorandum and articles
of association are public documents, open to public inspection. But the details of internal
procedure are not thus open to public inspection. Hence an outsider is presumed to know the
constitution of the company but not what may or may not have taken place within the doors
that are closed to him. The rule is of great practical utility and has been used in cases
involving rights and liabilities. Thus where the directors of a company, having the power to
allot shares only with the consent of the general meeting, allotted them without any such
consent, where the managing director of a company granted a lease of the company s
properties, something which he could do only with the approval of the board, where the

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managing agents having the power to borrow with the approval of directors borrowed without
any such approval, the company will be held bound.
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The doctrine of indoor management cannot be resorted to in the following cases. Firstly, the

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rule does not protect any person who had actual or even an implied notice of the lack of
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ynthe memorandum and articles and thus did not rely on
authority of the person acting on behalf of the company. Also, the rule cannot be invoked in
favour of a person who did not consult
dto transactions involving forgery nor those that are otherwise
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them. Neither does it extend
t also does not reward those who behave negligently. Nor does is
void ab initio. The doctrine
apply in casesS where the question is with regard to the very existence of an agency. It is also
not applied where a pre-condition is required to be fulfilled before the company itself can
exercise particular power. Finally, the doctrine can be invoke only with reference to acts
which relate to provisions of memorandum and articles, and not in a case where oppression is
alleged.

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